Question
Eagan Company has three product lines, A, B, and C. The following information is available: A B C Sales $ 30,000 $ 19,000 $ 10,500
Eagan Company has three product lines, A, B, and C. The following information is available:
A | B C | ||
Sales | $ 30,000 | $ 19,000 | $ 10,500 |
Variable costs | 19,000 | 10,500 | 7,500 |
Contribution margin | $ 11,000 | $ 8,500 | $ 3,000 |
Fixed costs: | |||
Avoidable | 5,000 | 4,500 | 1,000 |
Unavoidable | 2,500 | 6,000 | 750 |
Operating income | $ 3,500 | $ (2,000) | $ 1,250 |
Assume that product line B is discontinued and replaced with product line C. This will triple the production and sales of product line C without increasing fixed costs. Operating income will __________.
The answer key says that "increase $2,000" is the correct answer. Can you please thoroughly explain why this is the correct answer? If line B is dropped, will line A and C or just line C be operational? Will the variable costs of line C triple? Will the company still have to pay the unavoidable fixed costs of line B?
Thank you.
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